The Pricing of Investor Sentiment Factor Based on X-Capm Model

This paper proposes an investor sentiment factor that can capture the process of investors' extrapolation and explores the role of the sentiment factor in the asset pricing. Using U.S. stock market data, we empirically find that the modified three-factor model augmented with sentiment factor can better explain excess stock return. The modified four-factor and five-factor models augmented with the sentiment factor also perform very well. We show that the investor sentiment is not a redundant factor for three-factor model, the GRS statistics are lower and hence the new model is more efficient. Consequently, the sentiment factor proposed in this paper is a beneficial stock pricing factor with strong explanatory power